- Published on
Malaysian Banking Law – Insider Dealing in the Wholesale Financial Market
Introduction
Financial markets operate fairly only when all participants trade using information that is generally available to the market.
If a person possesses confidential information that is not available to other traders and uses that information to make a profit or avoid a loss, that person gains an unfair advantage over other market participants.
To ensure fairness and market integrity, section 141(1)(d) of the Financial Services Act 2013 (FSA 2013) and section 153(1)(e) of the Islamic Financial Services Act 2013 (IFSA 2013) prohibit insider dealing in the money market and foreign exchange market.
The prohibition is also reinforced by the Code of Conduct for Malaysia Wholesale Financial Markets issued by Bank Negara Malaysia.
The Simplest Meaning of Insider Dealing
Insider dealing simply means:
Using secret information that other people do not know in order to make money or obtain an advantage in the market.
The information must be:
You know something important before everyone else, and you trade because of that information.
That is insider dealing.
What Does The Law Prohibit?
Section 141(1)(d) FSA 2013 and section 153(1)(e) IFSA 2013 prohibit a person from:
Taking part in or carrying out a transaction based on information that is not generally available to persons who regularly deal in the money market or foreign exchange market, where the information would have a material effect on the price or value of financial instruments.
Breaking It Down into Simple Parts
The law asks four questions:
Question 1
Did the person possess information?
Yes.
Question 2
Was the information secret or confidential?
In other words:
Question 3
Would the information affect market prices if it became known?
Yes.
The information is important enough to influence market behaviour.
Question 4
Did the person trade based on that information?
Yes.
If all four answers are “yes,” insider dealing may have occurred.
Simple Example
Scenario
A treasury dealer at ABC Bank Berhad learns through internal communications that the Malaysian Government will announce a major policy tomorrow that is expected to strengthen the Ringgit significantly.
The information has not yet been announced publicly.
Only a small number of people know about it.
The dealer immediately buys a large amount of Ringgit before the announcement.
The next day:
Why Is This Insider Dealing?
The dealer:
Knew Secret Information
The announcement had not yet been released.
Knew It Would Affect Prices
The information was likely to strengthen the Ringgit.
Traded Before Everyone Else
The dealer bought Ringgit before the public knew.
Made a Profit Because of the Secret Information
The profit was generated from the informational advantage.
This is insider dealing.
Another Simple Example
Imagine an examination.
One student secretly obtains tomorrow’s examination paper.
Before the exam:
Why?
Because the student had information unavailable to everyone else.
Insider dealing works in a similar way.
The insider gains an unfair advantage because of confidential information.
Common Forms of Insider Dealing
Without limiting the scope of the FSA 2013 and IFSA 2013, insider dealing includes:
(1) Profiting from Insider Information
A person uses confidential information to:
Example
A trader learns confidentially that interest rates will increase tomorrow and immediately adjusts the bank’s trading position before the public announcement.
(2) Giving Insider Information to Others
A person may also commit an offence by providing confidential information to another person.
The recipient may then use the information to:
A treasury dealer tells a friend:
“The Ringgit will strengthen tomorrow because of an announcement I have seen.”
The friend buys Ringgit and profits.
Both individuals may face liability.
Disclosure of Insider Information
Market participants who possess insider information must not disclose it to others.
Disclosure is only permitted where it is:
Part of Employment Duties
Example:
A bank officer discussing the information with authorised colleagues who require it for their work.
Required by Law
Example:
Disclosure required by legislation.
Required by Regulators or Supervisory Authorities
Example:
Disclosure to Bank Negara Malaysia or other authorised regulators during an investigation.
Outside these situations, disclosure is prohibited.
Banking Example
Case Scenario
A treasury dealer at XYZ Bank Berhad attends an internal meeting.
During the meeting, senior management informs the treasury team that a major sovereign wealth fund will purchase RM5 billion worth of Malaysian Government Securities the following morning.
Management expects the purchase to increase demand and raise the market value of those securities.
The information is strictly confidential.
The transaction has not been announced publicly.
Later that evening, the dealer personally purchases a large quantity of the same government securities through another account.
The next day:
Application to the Case Scenario
The dealer possessed information that:
The dealer therefore gained an unfair advantage over other market participants.
This conduct amounts to insider dealing under section 141(1)(d) FSA 2013 and section 153(1)(e) IFSA 2013.
Solution to the Case Scenario
The treasury dealer traded government securities after receiving confidential information concerning a forthcoming RM5 billion purchase by a sovereign wealth fund.
The information was:
The subsequent profit resulted directly from the confidential information.
Accordingly, the dealer may have committed insider dealing under:
Difference Between Legitimate Trading and Insider Dealing
Legitimate Trading
Why Is Insider Dealing Wrong?
Imagine two traders:
Trader A
Knows a major announcement will happen tomorrow.
Trader B
Knows nothing.
If Trader A trades first and profits from secret information, Trader B never had a fair chance.
The market becomes unfair.
The law therefore seeks to ensure that:
Everyone trades on the same playing field.
No one should profit merely because they possess confidential information unavailable to others.
Critical Analysis
Insider dealing strikes at the heart of market integrity because it destroys confidence in the fairness of financial markets.
Investors and institutions participate in markets on the assumption that prices reflect publicly available information. If insiders are allowed to trade using confidential information, ordinary market participants are placed at a significant disadvantage.
The prohibition under sections 141 FSA 2013 and 153 IFSA 2013 therefore protects:
Easy Examination Summary
What is insider dealing?
Using confidential information that is not generally available to the market to make a profit, avoid a loss, or obtain an unfair trading advantage.
When does it occur?
When a person:
Because it gives insiders an unfair advantage and undermines confidence in the financial markets.
Simple Rule to Remember
“If the information is secret and capable of affecting prices, do not trade on it and do not tell others to trade on it.”
Introduction
Financial markets operate fairly only when all participants trade using information that is generally available to the market.
If a person possesses confidential information that is not available to other traders and uses that information to make a profit or avoid a loss, that person gains an unfair advantage over other market participants.
To ensure fairness and market integrity, section 141(1)(d) of the Financial Services Act 2013 (FSA 2013) and section 153(1)(e) of the Islamic Financial Services Act 2013 (IFSA 2013) prohibit insider dealing in the money market and foreign exchange market.
The prohibition is also reinforced by the Code of Conduct for Malaysia Wholesale Financial Markets issued by Bank Negara Malaysia.
The Simplest Meaning of Insider Dealing
Insider dealing simply means:
Using secret information that other people do not know in order to make money or obtain an advantage in the market.
The information must be:
- Not generally available to the public;
- Not generally available to regular market participants;
- Important enough to affect market prices; and
- Capable of influencing trading decisions.
You know something important before everyone else, and you trade because of that information.
That is insider dealing.
What Does The Law Prohibit?
Section 141(1)(d) FSA 2013 and section 153(1)(e) IFSA 2013 prohibit a person from:
Taking part in or carrying out a transaction based on information that is not generally available to persons who regularly deal in the money market or foreign exchange market, where the information would have a material effect on the price or value of financial instruments.
Breaking It Down into Simple Parts
The law asks four questions:
Question 1
Did the person possess information?
Yes.
Question 2
Was the information secret or confidential?
In other words:
- The public did not know.
- Other traders did not know.
- The information had not been announced.
Question 3
Would the information affect market prices if it became known?
Yes.
The information is important enough to influence market behaviour.
Question 4
Did the person trade based on that information?
Yes.
If all four answers are “yes,” insider dealing may have occurred.
Simple Example
Scenario
A treasury dealer at ABC Bank Berhad learns through internal communications that the Malaysian Government will announce a major policy tomorrow that is expected to strengthen the Ringgit significantly.
The information has not yet been announced publicly.
Only a small number of people know about it.
The dealer immediately buys a large amount of Ringgit before the announcement.
The next day:
- The Government makes the announcement.
- The Ringgit strengthens sharply.
- The dealer earns a substantial profit.
Why Is This Insider Dealing?
The dealer:
Knew Secret Information
The announcement had not yet been released.
Knew It Would Affect Prices
The information was likely to strengthen the Ringgit.
Traded Before Everyone Else
The dealer bought Ringgit before the public knew.
Made a Profit Because of the Secret Information
The profit was generated from the informational advantage.
This is insider dealing.
Another Simple Example
Imagine an examination.
One student secretly obtains tomorrow’s examination paper.
Before the exam:
- The student studies all the questions.
- Other students do not know the questions.
Why?
Because the student had information unavailable to everyone else.
Insider dealing works in a similar way.
The insider gains an unfair advantage because of confidential information.
Common Forms of Insider Dealing
Without limiting the scope of the FSA 2013 and IFSA 2013, insider dealing includes:
(1) Profiting from Insider Information
A person uses confidential information to:
- Make a profit;
- Avoid a loss;
- Improve trading results; or
- Obtain a financial advantage.
Example
A trader learns confidentially that interest rates will increase tomorrow and immediately adjusts the bank’s trading position before the public announcement.
(2) Giving Insider Information to Others
A person may also commit an offence by providing confidential information to another person.
The recipient may then use the information to:
- Make profits;
- Benefit clients;
- Benefit the institution;
- Benefit friends or family members; or
- Benefit third parties.
A treasury dealer tells a friend:
“The Ringgit will strengthen tomorrow because of an announcement I have seen.”
The friend buys Ringgit and profits.
Both individuals may face liability.
Disclosure of Insider Information
Market participants who possess insider information must not disclose it to others.
Disclosure is only permitted where it is:
Part of Employment Duties
Example:
A bank officer discussing the information with authorised colleagues who require it for their work.
Required by Law
Example:
Disclosure required by legislation.
Required by Regulators or Supervisory Authorities
Example:
Disclosure to Bank Negara Malaysia or other authorised regulators during an investigation.
Outside these situations, disclosure is prohibited.
Banking Example
Case Scenario
A treasury dealer at XYZ Bank Berhad attends an internal meeting.
During the meeting, senior management informs the treasury team that a major sovereign wealth fund will purchase RM5 billion worth of Malaysian Government Securities the following morning.
Management expects the purchase to increase demand and raise the market value of those securities.
The information is strictly confidential.
The transaction has not been announced publicly.
Later that evening, the dealer personally purchases a large quantity of the same government securities through another account.
The next day:
- The sovereign wealth fund completes its purchase.
- Demand increases significantly.
- Prices rise.
- The dealer earns a substantial profit.
Application to the Case Scenario
The dealer possessed information that:
- Was confidential;
- Was not generally available to the market;
- Was price-sensitive; and
- Was likely to affect the value of government securities.
The dealer therefore gained an unfair advantage over other market participants.
This conduct amounts to insider dealing under section 141(1)(d) FSA 2013 and section 153(1)(e) IFSA 2013.
Solution to the Case Scenario
The treasury dealer traded government securities after receiving confidential information concerning a forthcoming RM5 billion purchase by a sovereign wealth fund.
The information was:
- Non-public;
- Material;
- Price-sensitive; and
- Likely to affect market value.
The subsequent profit resulted directly from the confidential information.
Accordingly, the dealer may have committed insider dealing under:
- Section 141(1)(d) Financial Services Act 2013; and
- Section 153(1)(e) Islamic Financial Services Act 2013.
- Criminal proceedings;
- Civil enforcement action;
- Administrative penalties;
- Regulatory sanctions; and
- Disciplinary proceedings.
Difference Between Legitimate Trading and Insider Dealing
Legitimate Trading
- Information is publicly available.
- All market participants can access the information.
- No unfair advantage exists.
- Trading decisions are based on public knowledge.
- Market remains fair.
- Information is confidential.
- Information is unavailable to other market participants.
- Insider has an unfair advantage.
- Trading occurs before public disclosure.
- Market fairness is undermined.
Why Is Insider Dealing Wrong?
Imagine two traders:
Trader A
Knows a major announcement will happen tomorrow.
Trader B
Knows nothing.
If Trader A trades first and profits from secret information, Trader B never had a fair chance.
The market becomes unfair.
The law therefore seeks to ensure that:
Everyone trades on the same playing field.
No one should profit merely because they possess confidential information unavailable to others.
Critical Analysis
Insider dealing strikes at the heart of market integrity because it destroys confidence in the fairness of financial markets.
Investors and institutions participate in markets on the assumption that prices reflect publicly available information. If insiders are allowed to trade using confidential information, ordinary market participants are placed at a significant disadvantage.
The prohibition under sections 141 FSA 2013 and 153 IFSA 2013 therefore protects:
- Market fairness;
- Investor confidence;
- Price integrity;
- Equal access to information; and
- Financial stability.
Easy Examination Summary
What is insider dealing?
Using confidential information that is not generally available to the market to make a profit, avoid a loss, or obtain an unfair trading advantage.
When does it occur?
When a person:
- Possesses non-public information;
- Knows the information is important;
- Trades based on that information; or
- Gives the information to another person who profits from it.
Because it gives insiders an unfair advantage and undermines confidence in the financial markets.
Simple Rule to Remember
“If the information is secret and capable of affecting prices, do not trade on it and do not tell others to trade on it.”
0 Comments